Handbook of the Economics of Finance

Chapter 9

Entrepreneurship and the Family Firm

Vikas Mehrotra and Randall Morck

Abstract

Schumpeter views founding a family business dynasty as a key reward for entrepreneurship. However, inherited corporate control restricts the talent pool from which the business’s subsequent leaders are drawn, exposing a fundamental time inconsistency in Schumpeter’s thesis – what is good motivation ex ante, results in a higher cost of new entry ex post. Absent explicit mechanisms to inhibit blood successions, family loyalty perseveres in broad swathes of the world, particularly where formal institutions are weak, so groups of firms controlled by members of a family can coordinate strategies where independent firms cannot. Big Push development requires extensive ...